Beta coefficients and the capital asset pricing model Personal Finance Problem Katherine Wilson is wondering how much risk she must undertake to generate an acceptable return on her porfolio. The risk-free return currently is 4 %. The return on the overall stock market is 14 %. Use the CAPM to calculate how high the beta coefficient of Katherine's portfolio would have to be to achieve a portfolio return of 16 %.

Question

Carina Cameron

Business

30 March, 18:05

Beta coefficients and the capital asset pricing model Personal Finance Problem Katherine Wilson is wondering how much risk she must undertake to generate an acceptable return on her porfolio. The risk-free return currently is 4 %. The return on the overall stock market is 14 %. Use the CAPM to calculate how high the beta coefficient of Katherine's portfolio would have to be to achieve a portfolio return of 16 %.

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Answers (1)

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Derrick Valentine · Answer 1

Beta = 1.2

Explanation:

Given:

The risk-free return = 4 %

The return on the overall stock market = 14 %

The portfolio return to be achieved = 16%

Now,

from capital asset pricing model,

Expected return = Risk-free return + Beta (Market Return - Risk-free return)

on substituting the respective values, we get

16% = 4% + Beta * (14% - 4%)

or

12% = Beta * (10%)

or

Beta = 1.2